Former RBI Deputy Governor M Rajeshwar Rao calls for bigger banks, more consolidation in financial services industry
As India drives towards becoming a developed economy, the financial sector will have to go at a faster clip than the real economy for meaningful financial inclusion, he said.
- Mar 18, 2026,
- Updated Mar 18, 2026 2:01 PM IST
If India aspires to become a developed nation, it will need bigger banks, and there is a need for further consolidation in the financial services industry, feels M. Rajeshwar Rao, the former deputy governor of the Reserve Bank of India.
Also Watch: IDBI Bank Sale Called Off As Bids Fall Short, Govt Weighs Fresh Options For Disinvestment
Speaking at a conference organised by Assocham, Rao said there will need to be three doublings of the economy over the next 21 years as India drives towards becoming a Viksit Bharat. For an economy of that magnitude, the financial sector would have to grow commensurately or even more than the growth in the real economy for meaningful financial inclusion, he said.
"We need players with heft, and for this, besides the access to growth capital, the option of consolidation in the financial services industry will also have to come into play," Rao, who demitted office as RBI deputy governor in October 2025, stressed.
Over the last decade and more, there has already been some consolidation underway in the banking industry. The number of public sector banks has come down to around 12 now from 27 in 2000. There is a possibility that the number of state-owned banks will be further reduced through mergers.
Growth will need capital, and if not privatised, PSBs will require more capital from the government, he stated. "While disinvestment to the minimum levels permitted under the nationalisation act and increase in foreign investment limits are some of the options, there will still be concerns if these options are not exercised and the burden of capital raising for the entities will then fall on the ability to reinvest the profits from the business," Rao pointed.
Private banks have a comparatively easier option in consolidation and raising capital, he felt. "The comparatively liberal FDI limits and the ability to use voluntary merger routes give them greater flexibility in both raising capital and consolidation," said Rao.
But there the challenge was in getting a fit and proper investor and conforming to the statutory and regulatory prescriptions, he pointed. He felt the Reserve Bank as well as the government would have to relook at these regulations closely. There has been a bigger consolidation among the regional rural banks, with their number shrinking to 28 from 196. He also feels there is a need for consolidation of cooperative banks.
As of March 2025, there were about 1,457 cooperative banks, of which 838 were in Tier I, which had deposits of less than Rs 100 crore. There were only 6 urban cooperative banks (UCB) in Tier IV, which had deposits of over Rs 1,000 crore.
"The number of smaller UCBs is very large, but their share of deposits is very low. So, they will face challenges in competing and offering technology-driven banking services," Rao stressed.
While there is an umbrella organisation now in place for assisting UCBs, the challenge is in ensuring that they use its services and deliver in terms of technology-driven financial services, else they may face risks of falling behind amid competition, he noted. He also made a case for mergers in the non-banking financial services space, where he said there were over 9,000 NBFCs but only about 300 with sufficient heft.
One remarkable feature of the Indian financial ecosystem, he pointed out, was the growth of Unified Payments Interface (UPI) and digital payments. This, he feels, if integrated with the united lending interface, could revolutionalise digital lending in India by creating a seamless consent-based platform for credit access and eliminating the credit gap, particularly for small and medium enterprises and agricultural borrowers.
If India aspires to become a developed nation, it will need bigger banks, and there is a need for further consolidation in the financial services industry, feels M. Rajeshwar Rao, the former deputy governor of the Reserve Bank of India.
Also Watch: IDBI Bank Sale Called Off As Bids Fall Short, Govt Weighs Fresh Options For Disinvestment
Speaking at a conference organised by Assocham, Rao said there will need to be three doublings of the economy over the next 21 years as India drives towards becoming a Viksit Bharat. For an economy of that magnitude, the financial sector would have to grow commensurately or even more than the growth in the real economy for meaningful financial inclusion, he said.
"We need players with heft, and for this, besides the access to growth capital, the option of consolidation in the financial services industry will also have to come into play," Rao, who demitted office as RBI deputy governor in October 2025, stressed.
Over the last decade and more, there has already been some consolidation underway in the banking industry. The number of public sector banks has come down to around 12 now from 27 in 2000. There is a possibility that the number of state-owned banks will be further reduced through mergers.
Growth will need capital, and if not privatised, PSBs will require more capital from the government, he stated. "While disinvestment to the minimum levels permitted under the nationalisation act and increase in foreign investment limits are some of the options, there will still be concerns if these options are not exercised and the burden of capital raising for the entities will then fall on the ability to reinvest the profits from the business," Rao pointed.
Private banks have a comparatively easier option in consolidation and raising capital, he felt. "The comparatively liberal FDI limits and the ability to use voluntary merger routes give them greater flexibility in both raising capital and consolidation," said Rao.
But there the challenge was in getting a fit and proper investor and conforming to the statutory and regulatory prescriptions, he pointed. He felt the Reserve Bank as well as the government would have to relook at these regulations closely. There has been a bigger consolidation among the regional rural banks, with their number shrinking to 28 from 196. He also feels there is a need for consolidation of cooperative banks.
As of March 2025, there were about 1,457 cooperative banks, of which 838 were in Tier I, which had deposits of less than Rs 100 crore. There were only 6 urban cooperative banks (UCB) in Tier IV, which had deposits of over Rs 1,000 crore.
"The number of smaller UCBs is very large, but their share of deposits is very low. So, they will face challenges in competing and offering technology-driven banking services," Rao stressed.
While there is an umbrella organisation now in place for assisting UCBs, the challenge is in ensuring that they use its services and deliver in terms of technology-driven financial services, else they may face risks of falling behind amid competition, he noted. He also made a case for mergers in the non-banking financial services space, where he said there were over 9,000 NBFCs but only about 300 with sufficient heft.
One remarkable feature of the Indian financial ecosystem, he pointed out, was the growth of Unified Payments Interface (UPI) and digital payments. This, he feels, if integrated with the united lending interface, could revolutionalise digital lending in India by creating a seamless consent-based platform for credit access and eliminating the credit gap, particularly for small and medium enterprises and agricultural borrowers.